DELAYED REACTIONS
Sarbanes-Oxley strikes again
By Jason Karaian

More than three years after taking effect, Sarbanes-Oxley is still wreaking havoc on corporate reporting.

In 2005, accounting restatements nearly doubled to a record 1,195, according to US research firm Glass Lewis & Co. This year, scores of companies – among them General Motors, Nortel Networks, Bausch & Lomb, and Bally Total Fitness – announced that they would miss the US Securities and Exchange Commission’s March 16 deadline to file their annual reports.

While substantive problems have not disappeared, today a company is more likely to revise or delay its results simply to play it safe. Companies are using extreme caution as they continue to work on internal controls, says Ed Nusbaum, CEO of accounting firm Grant Thornton in the US, so they are handling minor errors differently than they have in the past. “Before, if something was borderline, there was a tendency to say, ‘We’ll fix it next year,’” he says. “Today if something is wrong, you fix it now.”

Tardy 10-Ks stem from a variety of causes. HealthSouth announced it would postpone its annual report as it continues to deal with fallout from a massive accounting scandal. GM says it will be late due to accounting errors related to cash flows from a subsidiary of GMAC.

No matter the reason, regulators and investors don’t take kindly to late filings, says James Duncan, accounting professor at Ball State University and former controller at fast-food chain KFC. “If you delay the 10-K, the SEC is going to ask questions,” he says. Late filings can also precipitate stock declines, securities suits, and loan defaults if they are prohibited in loan covenants. Bally Total Fitness, which was forced to delay filing its 2005 annual report because of complications with restatements of prior years, solicited waivers from creditors to avoid defaulting on loans due to the filing delay. The waivers were granted, but at a price: Bally paid US$10 in cash or equivalent shares for each US$1,000 in principal to obtain the one-time consent.

The current avalanche of do-overs suggests a variety of causes, including accounting for derivatives, leases, pensions, revenue recognition, and asset retirement obligations (FIN 47). In many cases, restatements arise from new guidance from regulators or from trying to force complex transactions into a one-size-fits-all rule, says Baruch College accounting professor Steven Lilien.

So far, the surge of restatements shows few signs of abating. Tenet Healthcare already announced plans to revise earnings on two separate occasions this year. Clearly, companies continue to struggle with Sarbox. What’s less clear, says Lilien, is whether executives are going to give back the hefty compensation they received based on numbers that were later revised.